Bell Equipment’s 21-year-long relationship with US equipment manufacturer John Deere looks set to be unwound with Monday’s announcement that the two companies are in discussions about a possible share transaction.
The announcement was released minutes before the publication of interim results, which revealed a sharp deterioration in Bell’s grim five-year track record.
The announcement that IA Bell, which holds 39% of Bell Equipment, has made a tentative offer to purchase Deere’s 31.4% of Bell Equipment, has prompted speculation that there are plans to delist the company at a later stage.
One corporate lawyer explained that because IA Bell holds over 35% it will not be obliged to make a mandatory offer to minority shareholders if it buys the Deere stake. And in the event that Bell Equipment is delisted, the minority shareholders will not have any appraisal rights.
Although it will have over 70% of the shares, IA Bell would have to get approval from 50% of the minority shareholders if it wants to delist.
This will be grim news for the long-suffering minority shareholders who have watched on as underperforming management failed to generate adequate returns from Bell Equipment’s world-class dumpster trucks.
The move to buy out the John Deere shareholding comes amid ongoing criticism by minority shareholders about the prolonged underperformance by management and speculation that a Chinese company has made a takeover offer. That speculation, carried in Financial Mail last month, was denied by management.
Monday’s announcement of a possible deal saw the share price spike almost 30% to close at R5.95, its highest level since early August. Although an improvement on the low of R2.50 to which the share price slumped pre-Covid, Monday’s close is significantly below the net asset value (NAV) of R38.5 a share and also below the R20 at which it traded back in 2014.
Ahead of a fractious annual general meeting in July, one US-based investor Kerem Aksoy, chief investment officer of Glacier Pass Partners told Moneyweb that Bell’s engineering prowess was overwhelmed by the company’s misguided capital allocation and investment policies, resulting in the net destruction of shareholder value. “Since 2014 Bell has invested over R3.5 billion, well in excess of the R750 million of net profit it generated over the same period.”
Shareholder activist Chris Logan, who holds shares in Bell, was involved with Aksoy earlier this year in a bid to force the board to align management’s remuneration policy with shareholder value creation. The initiative failed, prompting Logan to state: “Bell has a great product and a great reputation across the globe but it’s being destroyed by a management strategy that focuses on growth at any cost.”
On Monday Aksoy said that the share transaction announcement did not disclose details around price. But he noted that during the AGM in July Bell Equipment chair Gary Bell told shareholders that the board had the right formula to turn the business around and get the market pricing closer to or better than the net asset value.
“This”, said Aksoy, “highlights Gary Bell’s belief that Bell shares had a path to being worth NAV or above.”
During the six months to end-June the company’s revenue was down 24% to just over R3 billion and headline earnings slumped 119% to a loss of 31c. However net cash flow was boosted from an outflow of R124 million in first half 2019 to an inflow of R444 million.
Aksoy said the turnaround in cash flow was positive news. “By shutting down their production facilities and selling excess inventory, for the first time in five years, Bell was able to reduce net debt – down 40% to R1.1 billion from R1.8 billion.”
An additional positive factor, said Aksoy, was management’s reference to green shoots of recovery in many of its markets.